Abstract
Chen and Chen (J Ind Compet Trade 11:43−55, 2011) analyze the effects of compatibility under system product Cournot competition with network externalities. They show that a firm’s optimal strategy is to set an incompatible system standard, even though perfect compatibility is socially optimal. In this case, a social dilemma arises. However, their result depends on a specific assumption about the network size. We use the framework of Shy (1995) to modify this assumption, and hence show that the social dilemma identified by Chen and Chen (J Ind Compet Trade 11:43−55, 2011) does not arise.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
Notes
Hereafter, we follow the number of equations given by Chen–Chen.
Chen–Chen assume that θ ∈ [0,1]. That is, they allow the two system products to be homogenous, i.e., θ = 1. Hence, the products are perfect substitutes. As we show subsequently, even in this case, the two firms can set the degree of product compatibility to zero; i.e., α i = α j = 0. This means that these products are not compatible even though they are perfect substitutes. This seems unreasonable. At the other extreme of independent products, θ = 0, suppose that α i = α j = 1. This implies that these products are perfectly compatible even though they are independent. This is also unreasonable. Hence, we assume that 0 < θ < 1.
Chen–Chen assume that θ > aα i . Hence, they only consider strategic substitutability.
References
Chen H-C, Chen C-C (2011) Compatibility under differentiated duopoly with network externalities. J Ind Compet Trade 11:43–55
Economides N (1996) Network externalities, complementarities, and invitations to enter. Eur J Polit Econ 12:211–233
Shy O (1995) Industrial organization: theory and application. MIT, Cambridge
Author information
Authors and Affiliations
Corresponding author
Rights and permissions
About this article
Cite this article
Toshimitsu, T. Compatibility Under Differentiated Duopoly with Network Externalities: A Comment. J Ind Compet Trade 14, 331–335 (2014). https://doi.org/10.1007/s10842-013-0170-0
Received:
Revised:
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.1007/s10842-013-0170-0